You can make a fortune by buying stuff no else wants to touch.
When I started writing about investments years ago I was briefly baffled about the term contrarian.
I can't understand why, because it is a very simple concept: you make money by investing in stuff most people won't touch.
If you make the right call, you can pick up high-value stocks at low-fashion prices, and cash in when they come back into vogue.
The theory is so simple, and effective if done correctly, that it has been rewarded with its own –ism: contrarianism.
The opposite of contrarianism is buying popular stocks on the assumption that if everybody else is buying them, they must be good. If that investment philosophy had been rewarded with an –ism, it would be called sheepism.
On the contrary
Naturally, contrarianism doesn't always work. Sometimes there is a very good reason why other people won't touch that rock bottom stock. Cheap doesn't always mean good value.
You also have to do your research, trust your instincts, and be prepared to defy the herd. Humans are social animals, so that isn't as easy as some people pretend.
Most investors aren't contrarian and quite right too, because if the majority were contrarians, they would no longer be contrarians.
So what should an uber-contrarian should be doing right now? Here are some of the more obvious areas, please feel free to add a few of your own.
Sell Gold
The gold price has gone berserk. It recently hit a high of $1,200 a troy ounce and some claim it could hit $2,000 or even $3,500. You can't walk along the average high street without tripping over signs offering to buy your gold at record prices.
Yet the global economy is beginning a tentative recovery and that could quickly reverse the trend. Gold has little practical or industrial use except as a store of value, and its price can be shockingly volatile. Just a few years ago, it cost $250 an ounce. Everybody wants to buy gold these days, which makes it a contrarian's dream sell.
Buy pounds
Sterling has collapsed around 30% since the credit crunch. In January, legendary investor Jim Rogers said the pound was finished, and you should sell any sterling you have because it's rubbish. The Bank of England has since made things worse by printing another £200 billion of our junk money.
Chancellor Alistair Darling's Pre Budget Report spooked the bond and currency markets, sending the pound lower against the dollar and yen. The only reason it didn't fall any further against the euro is that it can't. Europeans come to London to smile at our low property prices. Given all the bad news, the only sensible contrarian response is to buy. You might also take a punt on dollars, for similar reasons.
Go long on Dubai
Actually, the time to go contrarian on Dubai was last week, before Abu Dhabi stepped in with a £6 billion bailout. Panic in the Gulf didn't just lead to a stock sell off in Dubai, but also in Abu Dhabi, Kuwait, Saudi Arabia and Qatar, even though they have gas and oil reserves.
Contrarians sometimes have to be quick on their toes, but any nimble-footed investor who bought at last week's close will now have enjoyed a 10% stock market rebound in a single day.
Sell China
China has so much money, it literally doesn't know what to do with it. While the UK heads for a 12% budget overspend, the Chinese government has underspent by 25% in 2009, and officials are desperately trying to find projects to put their money into. It's like an Oriental superpower version of Brewster's Millions.
China has been growing at 9% a year since, um, forever. By 2040, it will be the world's economic superpower, and will be able to buy the entire UK with a bit of spare change it picks up on the street in Shanghai. China is the future.
The contrarian mind should be flashing lurid "sell" signals at this point, although one of the most famous contrarians believes China is a trend to follow rather than defy: Anthony Bolton.
Buy RBS
Every investor will have considered going contrarian on the banks in recent times, with mixed results.
I've had three bites at buying Barclays (LSE: BARC) at the bottom of the market, and each time it dropped much lower. I went contrarian on Royal Bank of Scotland (LSE: RBS) a couple of months ago, and I'm down 40%.
I'm tempted to have another go, on the assumption that something this bad surely has to come good some time. Successful contrarianism is all in the timing, and so far my timing has been terrible.
Buy Iceland
Iceland was the first entire country to fall foul of the credit crunch, and the subsequent disarray its currency fell by half against the euro. But at least it has its own currency, and its vicious devaluation is already laying the groundwork for a recovery.
Iceland has taken its medicine early, but eurozone Greece and Spain have been denied their medication by ECB strictures. True contrarians would have been snapping up property in Reykjavik months ago, but there's still time.
Ireland could be another opportunity, having recently swallowed harsh budgetary remedies. But unlike Iceland, it can't devalue its currency.
Buy Greece
Er, on second thoughts. This is taking contrarianism too far, but maybe in a few months…
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